Signal vs. Noise: What Today’s Markets Are Really Telling Us with Willy Walker
Denise:
First of all, I want to welcome everyone and say good morning, and that I am so particularly thrilled to have Willy Walker in Cambridge today. He is a man of his word. We were very fortunate a year ago that Willy agreed to be recorded for a podcast interview for our Meet the Visionaries series. If you haven't had an opportunity to download that podcast after this session with Willy, I highly recommend it. It has to go down as one of my favorite podcast interviews of our three years in production of this series.
Thrilled to have you here, Willy. I know you have a frenetic schedule and the students are so looking forward to this time with you. We are delighted to have you for a specialized Walker Webcast recording here at MIT. Before we begin, we have a few housekeeping notes.
Today's session is being recorded for the Walker Webcast. The recording is expected to air tomorrow and will be promoted across Walker & Dunlop's social and digital platforms. Please silence your phones, and we ask that you hold your questions until the Q&A portion at the end of the session.
This is very important. Questions will not occur until after Willy Walker's finished his presentation.
During Q&A, I will come around with a microphone that will be passed to you. By asking a question, you are consenting to be included in the recorded Walker Webcast. Please state your name before asking your question.
Now it is my pleasure to introduce Willy Walker, chairman and CEO of Walker & Dunlop and host of the Walker Webcast, which has received more than 23 million views since it began over five years ago.
Today, Willy will share his outlook on the economy and commercial real estate in 2026, including the forces shaping interest rates, energy prices, consumer sentiment, capital flows, multifamily supply and demand, and the return of transaction activity. Please join me in welcoming Willy Walker.
Willy Walker:
Thank you, Denise, very much, and good morning. I love going and speaking at universities across the country, and it's a real honor for me when I go to universities that I could have never gotten into. In some instances, that's a debatable point, but at MIT, that's a very clear point that I could have never gotten into MIT. It's a real honor for me to be here today and talking to all of you.
The other thing that I would say, my friend, Sharmil Modi just walked in, and Sharmil went to Harvard College up the road, but he was his class day speaker at Harvard. If any of you get a moment, you ought to go take a look at Sharmil's class day speech because it's a great one.
With all that said, it's really fun to be at MIT today. Having gone to business school just up the river, it's always fun to come back to Cambridge and see the Charles River with all the activity going on and the crew shells. I ran the marathon a number of times when I was here, and that was just last week. I had three of my business school classmates who ran with me way back in the dark ages, who all went and actually ran last Monday, which was really great for the three of them.
Let me dive into the presentation. I want to get to signal versus noise. As Denise said, I typically like questions during presentations, but I guess from an AV standpoint, it's better for us to wait until the end when we have the mic that's going to go around. If you've got something that comes up in the middle of it, just hold the question, and we can back up to the slide if you need to. It's just easier from an AV production standpoint for us to do all the questions at the end when we've got the mic going around the room.
Signal Versus Noise. It seems like there's a lot of noise in the markets today, not just in the commercial real estate markets, but just broadly. The idea was to just dive into a little bit of the data that might be able to pull out signal versus noise and what we're seeing in the markets. So let me dive in here.
What was expected in Trump 2? What was expected in Trump 2 is lower energy prices, immigration reform, lower taxes, increased M&A, and deregulation. Those are the things that everyone said, this is what the second Trump administration is going to bring to the world that we live in. On pretty much all of those, the Trump administration has been very effective at actually putting in policies that have delivered on all of that. You can see here M&A back and being bolder than almost ever, hasn't quite hit the peak of 2021 that you can see in the middle there, but number two over the past decade as it relates to actual M&A activity.
The other thing on that black line is that's the number of transactions. As you can see, the transactions are actually getting bigger. As that goes down and the aggregate amount goes up, it's just bigger companies, more M&A activity, which was something that we'd expected to see. In 2026, from both an M&A standpoint, as well as from an IPO standpoint, is looking like it's going to be a wildly active year in the capital markets.
One of the big questions that I have is, as companies like SpaceX and some of the AI companies go public, where does that capital come from? If SpaceX goes public for a trillion five valuation or a $2 trillion valuation, that's capital that has to come from somewhere. Are people selling other holdings and migrating into it? Are they getting out of a private credit position to go buy into those IPOs? Where's that capital come from, and what does that mean for the broader markets as you get trillions of dollars of IPOs coming out in 2026?
M&A is back. Tax cuts. The big beautiful bill gave tax cuts across the board to every level, every quintile of taxpayers has more in their pockets. I think one of the big things that people were projecting for right now, if you look, if you rewind the clock, when the big beautiful bill got passed last summer, many people were saying there's going to be a tax refund that goes to a great number of Americans and they're going to get an average check of $2,200 in May of 2026, and that's going to stimulate a lot of economic activity. Then the Iran conflict happened and sort of everything's kind of gone to the side, but in a normal course of business, you would have been getting these refund checks off of the big beautiful bill that would have put a $2,200 on average into people's pockets, which is sort of like the stimulus bill that went through during the pandemic, which would have driven a lot of retail spending. We'll see whether all that plays out, given the backdrop of the macro situation today.
Border encounters, you can see here the Trump administration clearly has been extremely, if you will, effective in implementing the border security that they had campaigned on and said that they were going to get to. I will show later on something that shows the implications of this as it relates to the demand side of the equation on rental housing, not an insignificant issue.
Then crude prices, one of the interesting things on this is you can see back here when Trump came into office, crude prices were at 80 bucks a barrel. They got down over here on the far right in January, down into $56, $57 a barrel. The back of the envelope number on what that means to inflation is that for every $10 change in the price of a barrel of oil, you pick up about 20 basis points in the CPI. So as you went from 80 bucks a barrel down to 60 bucks a barrel, you're picking up $20, or you're picking up almost 40 to 50 basis points in the CPI because oil flows through everything. So, in that, you could have seen from going up here down to there that the probably new Fed chair, Kevin Warsh, would come into his new role with a backdrop of inflation sort of being under control. Then, all of a sudden, a round hits and we see where oil prices have gone. So now you go to the other end of that. From 60 to 100, do the math, you're adding almost a percentage point to the CPI print if oil prices stay up at that level.
On consumer sentiment, this is the one side to it all. You kind of look at where the stock market has gone. I got a chart in a second on that. But this is the one that I think probably confounds people in the Council of Economic Advisors, as well as the president himself, which is that they look at the stock market doing great. They look at all the innovation that's happening in our country. They look at our country versus other countries, and they say, man, we are doing a great job. Then they look at this chart, and they say, uh-oh, but the consumer isn't sort of behind us. The consumer isn't feeling good. The consumer isn't right now feeling any better off than they were when Trump came into office back here. You can see it's actually fallen kind of off a cliff.
Clearly, forget about the politics of all that in the midterm elections. This is one of those data points that I'm sure as they look at all the other charts of what they set out to do and have delivered on, they look at this, and they say, what are we missing here?
As I said, where are we on the equity markets? This slide's a pretty interesting one. If you look at inauguration day, where you had the 10-year is the black line and the blue line is the S&P 500. Those two were inverted in the first year of the administration. They drove the cost of debt down, and they drove the equity markets up. Most people would look at that and say, hey, we're doing a great job. Then all of a sudden, obviously, they converge together at the beginning of the Iran conflict. Then you can see the recovery that's happened.
The question I would have right now is, if you will, how real is that recovery? Do these two charts continue to move away from each other, and S&P continues to go up, and the cost of debt continues to go down? Or do they turn around and get back to the two convergence points you see on this in July of last year and then in March of this year?
K-shaped economy. You hear a lot about this. This slide back to January of ‘23 really shows you what has happened as it relates to consumer spending on the upper portion of the economy and the lower portion of the economy. Since ‘23 and the Great Tightening, where the cost of debt went up, credit card payments go up, the cost of flying on an airplane goes up, everything else, you can see here that the top third of the economy earning over $250,000 annually, that's actually smaller than a third, are the ones driving the spending. And then the rest, which is earning less than $75,000 annually, has sort of fallen off precipitously.
A lot of people have talked about the fatigue or that the U.S. Consumer is going to kind of give up. So far, that hasn't played out. You look at consumer credit card default rates. While they have gone up significantly since the post-pandemic era, where they got to historic lows, they're no different than they have been on a historic average as it relates to both DQs, delinquencies, as well as default rates. So the consumers actually held in better than many people had thought. But the K economy here really does show you that the majority of consumer spending is happening in the top part of the economy, not in the lower parts of it.
How has the K economy played into multifamily? This is kind of an interesting slide for two reasons. One, you can clearly see here on the 76 basis point difference between class A and class C multifamily, that there is a huge difference of the newer product, more amenitized, has a big pricing advantage.
But then look at vintage for a moment, because I think vintage is really interesting. You sort of ask yourself, how is it that assets that are newer or from 2020 until today are trading at a higher cap rate, or as you all know, a lower value than a 2010 or 2000 vintage? The issue on that one is the fact that core capital has basically pulled out of the commercial real estate market over the past couple of years. It's been that value add capital that has actually been active in the market for the past couple of years. Hence, those investors of value add capital are driving down cap rates. And the pullback in core capital is what has made class A newly delivered actually trade at a higher cap rate or a lower value.
But as you can see here, I spoke to Avalon Bay's development group last week, and Avalon Bay is going right at that higher-end product. What they're building and what they own is directly targeted at the upper part of the K economy. As a result of that, they're seeing rent growth, and they're in the right markets with the right clients.
This is on multifamily investment sales volumes. A couple of things jump out to me on this slide. First of all, look how consistent the market was from 2015 to 2020. Like you sit there and you're like, oh, there'll be one year that's good and one year that's bad and whatever. I mean, it's literally like right on top of each other for an entire five-year period up to the pandemic. And then obviously we have a big dip down, and then we have this big spike back up. The thing to keep in mind here is we're talking about kind of a recovery of the markets right now. You'll hear myself and other CEOs of services firms talk about the markets are recovering.
The market's pretty much recovered. If you look at the average volume for the last year, it's back to pre-pandemic levels. The thing about it is that a lot of us look at this and say, investors and Walker & Dunlop look back, and they say, why aren't you back at these volumes? Who knows whether we ever get back to those types of volumes, but from a normalized market standpoint, you can see the hiking period, the trough, and now we're in that recovery period. But as it relates to overall volumes, we're pretty much, as far as multifamily investment sales, we're sort of back to pre-pandemic levels.
This is an interesting slide, which doesn't take all of you with your MIT soon-to-be degrees to understand this. Hindsight's obviously always 20/20 vision. But go back and look at the spread. This is cap rates versus the 10-year.
Light blue is the cap rate. The dark line is the 10-year treasury. Then the bottom one is W&D tract institutional sales. So this is multifamily institutional sales and the volume of multifamily institutional sales. Obviously, you've got the pandemic that comes in right here in this moment. So you have no activity during the pandemic. Everyone's gone home. Nothing's happening. But look at the spread between cap rates and interest rates. It does not take an MIT degree to realize that this is a really good time to be buying commercial real estate and buying multifamily. The spread between what you're paying in interest rates and where you are from a cap rate standpoint.
Then, of course, everyone sees this, and they go, great, now it's time to buy. And look at what happens to volume. Everyone gets the memo here, and they get to a point here. The problem with that is you really didn't want to be a buyer right here. By saying what I just said, I'm insulting every single Walker & Dunlop client. I know this is going out on our webcast. To everyone who's going to be watching in on this, I'm not trying to be…
But hindsight's 20-20 vision. Almost, not all the deals that happened here are “in trouble.” But this is sort of a vintage of deals here where cap rates and interest rates are compressed, where that's not a great vintage. If you bought there, you're probably not getting into your promote. I just put this out here because as you go into your careers and you see a chart like this, you just sort of say, let's make sure we're looking at the data when we can see a spread like that and say, let's take advantage of it. Then you see this collapsing of the two, and you sort of say, maybe now is not the time for me to be buying.
What's amazing to me is the amount of institutional capital that sees all of this, and they say, we need in on the party. Like, got to go. Let's go buy. And they made a ‘buy here or here’ that they now look back on and say, maybe we shouldn't have jumped into the party at that point.
This slide is on debt volumes. The thing I love to look at is that we pull this from the Mortgage Bankers Association. This isn't our data. But I will also tell you, I've been in this industry for almost a quarter of a century. I have yet to be presented with by either my team or the Mortgage Bankers Association a slide that goes down here.
It's always up and to the right. Somehow or another, the future always looks nice. It obviously doesn't always go that way because back in right here, where they were projecting it to continue to go to the right, we fell off quite dramatically.
The one thing to keep in mind on this chart is that this is all based off of maturity volume, maturity schedules. It sits there and says, OK, you did a huge amount of debt in 2020 and 2021. A trillion five between those two years. You sit there, and you say, OK, most of it was 10-year paper, project out 10 years.
You go 2029 and 2030, you've got to redo all that paper. A lot will be redone in between. But from a maturity standpoint, these two years are going to be significant years given the amount of volume that went on in these two years.
The thing to keep in mind that is very different is the following. In 2020, just on our agency volume at Walker & Dunlop, we did $20 billion of lending with Fannie Mae and Freddie Mac. In 2020 at W&D, we did not do a single five-year loan, not one, zero. Out of $20 billion in 2020, we did not do a single five-year loan. It was all 10-year paper, some seven-year paper, and some longer than that. But the great majority of it was 10-year. All that $20 billion that we did in 2020 is set to refi in 2030.
Now go to 2025. Last year of our $16.8 billion of lending with the agencies, 63% was five-year paper. 63% was five-year paper. What you're getting here is you've got all of these maturities in 2020 and 2021, as well as all the maturities in 2024 and 2025 that are all going to pile up right here because the market has shifted. Now why did the market shift?
A lot of people look at where cap rates are right now, and I'll show you a slide in a second as it relates to buyer sentiment, seller sentiment, and builder sentiment. But they look at cap rates right now, and they say, I don't want to sell at this elevated cap rate. So because they don't want to sell at this elevated cap rate, they say, let's just kind of refi the asset. But I don't want to put 10-year financing on it because if I decide to sell it in year three, I've got a lot of yield maintenance that's left in the mortgage that I have on the property. I want to go shorter.
Let's go five. So first of all, it's prepayment flexibility why they've gone five. The other thing is just the steepness of the yield curve. Five-year borrowing has been significantly cheaper than 10-year borrowing. And a lot of the deals that need to get redone in 25 and 26 were bought back, maybe they were bought in 21 or 22 with a three or five-year instrument on them. That cost of financing has made it that the performance of the asset is such that they need every dollar they can possibly get. So as a result of that, they're going shorter at a cheaper cost of capital than going longer at a higher cost of capital.
And so that has made a very interesting dynamic in the market. A) that everyone's borrowing short. B) you're going to get this big pile up in 2030 and potentially 2031, depending on what volumes are in 26, of 5-year and 10-year paper that all needs to get redone at the same time.
One of the things we're talking to a lot of our customers about is you may not want to have a refi coming up in this window. You might want to try and push out if you possibly can and not have it come up for refinancing at the exact same time.
Here's the buy-build sentiment slide. For one second, take a look here. Remember where we were in ‘21 and’ 22 when I was talking about that volume spike. This should remind you of one thing. Markets are made by buyers and sellers, but if nobody wants to sell, you really don't have a market.
Everyone back here was a seller. All the dark blue is the sales. Everyone was a seller. It's like, I love that cap rate. Let's go. Let's sell it. You could see the buyer sentiment is the light blue, which was, a lot of people you say, are you a seller or a buyer? It was like, no, I'm more of a seller today than I am a buyer, but obviously there are plenty of buyers to buy. As you can see, the build sentiment moved from Q3 ‘21 and pretty much went straight down until right here in what is that Q3 of ‘24. Everyone was, I'm a buyer or a seller, but I'm not a builder. And now all of a sudden, you can see the build sentiment coming back out.
The interesting thing, look at how much is in light blue. There are all these buyers out there. They're like, I want to buy, I want to buy, I want to buy, but there are no sellers. At the end of Q4 of last year, only 4% of survey respondents were actually sellers.
We've bought 18 companies at Walker and Dunlop. I've always said that companies are sold, they're not bought. If we want to go buy a company and wildly overpay for it, we can go buy a company. But if you want to actually go make a good deal, you're going to find a willing seller who wants to sell their company to Walker and Dunlop and become part of Walker and Dunlop. That's how good M&A is done.
So similarly, in the property markets, you can see here, right now, we are in a buyers, it's not a buyer's market because there are too many buyers who want to buy. It's actually a seller's market, but sellers right now don't want to sell.
One of the reasons you've got this amount of volume in the sales market is because of this slide. This is capital flows. Capital called, capital distributed, and five-year rolling net distributions cumulative. As you can see on the five-year net distributions cumulative, we are way, way negative.
What's ended up happening is that LPs who have invested in commercial real estate private equity funds have sat there and they've said, look, you called all this capital back here, the light blue is all capital calls, and you haven't redistributed any of that capital back to me. You want to go raise private equity fund VI, private equity fund VII, you need to return capital to me before I'm going to give you another dollar for your next fund. That is what's driving. You look at this buyer-seller sentiment, nobody really wants to sell. Yet you go back here, and you say, but the sales market is actually reasonably active. That's because investors want their money back.
It's that sort of forced transaction volume that's going on in the market today that is really driving volume. It's not because they're saying, I love that cap rate and want to sell into the market. It's because they need to return capital to their LPs. Until they do that, they're not going to get capital for their next fund.
You can see here, this slide is pretty interesting as it relates to private credit versus commercial real estate. You can see the light blue is non-traded REITs. The dark blue is non-traded business development corporations. Most of that is private credit funds. You can see here that it was all commercial real estate in 2020. In 2021, BDCs or private credit started to come out, but it was still predominantly commercial real estate. Then boom, from 22, it was all commercial real estate that falls off a cliff. Then, BDCs or private credit start to grow. The real question now is what happens with the redemption cues in private credit? Does that end up flowing back into commercial real estate private equity?
Right now, I would say to you that commercial real estate private equity will benefit from the rotation out of private credit funds. This just shows you here the redemption cues that are there. And what I was just talking about, you can see that the redemption cues on the non-traded REITs have come down significantly. You can see the redemption cues on the non-traded BDCs going up quite significantly.
This slide, you've all seen it, heard it. An effective or functioning market is when you've got average starts and your average completions relatively close to each other. That's one of the reasons, quite honestly, why you're back here with very consistent sales volume is because construction starts and deliveries all kind of paired up. But obviously, the pandemic kind of turned everything on its head. You get back to that quarter where everyone's like, wow, I got to get into this market. I'm going to go make an investment. And boom, we get lots of shovels going in the ground and starts start to spike. And you're still with a delivery number that's normalized. Then all of a sudden, deliveries, all these construction starts turn into deliveries.
What everyone sees in this slide, obviously, is that because you had starts come down significantly, you're seeing deliveries come down with the starts. That is going to create what should be an undersupplied market. But what we've seen is that you're looking at this slide, and this is your multifamily demand slide. What everyone was looking at was, okay, starts have gone down, deliveries will go down. If you were looking at that back in here, you're like, demand, which is this column bar, demand's just going to keep on going up.
Demand keeps going up, supply and starts go down, and it's a great market, and we can start to push rents. Except as you can see on this, for the last three quarters, demand has fallen off. And demand has fallen off significantly.
One of the big questions there is, why has demand fallen off when the price of multifamily housing is so much cheaper than single-family housing? That's not the market losing in the competitive battle with single-family. Let me just show you really quickly on single-family versus multifamily. I'll come back to that other slide.
This darker line is what the cost of home ownership is on principal and interest on a mortgage payment. The bar charts are the median price of a single-family home in America. The blue is the average cost of renting in America. You go back to 2019, 2020, and you were much better off buying a single-family house right here for an average price back then of $280,000, much better off buying your $280,000 home, putting a mortgage on it, and your principal and interest were down here at less than $1,200 a month. The average rent in the United States back then was $1,400 a month.
You were $200 in the black on a monthly basis for having your single-family home and paying your P&I on your mortgage than you were renting. Then all of a sudden, as you can see, because of the pandemic, the cost of single-family homes started to skyrocket. And that's this bar chart going all the way up, where you move from the average median price being at $270,000 all the way up to, what was that, $430,000 over that period of time. To buy that $430,000 home and pay principal and interest on your mortgage, as you can see on this line, it skyrocketed. You went upside down on your cost of home ownership versus the cost of renting. Look, the cost of renting went up significantly from $21,000 to $23,000, but then it's basically plateaued since then.
But the important thing about this is to think about it from a structural standpoint, that right now it is significantly cheaper to rent than it is to own a home. Until mortgage rates come down and this bar chart continues to fall down, and no one's wishing that we lose value in single-family homes in America, but until the values continue to come down and the cost of borrowing continues to come down, it's still going to remain much, much cheaper to rent than to own a home.
If that's the case, multifamily is holding up really well against single-family. People aren't saying, oh, it's cheaper for me to own a single-family home than to rent. Then what is it that's making that chart as it relates to demand come down? The only thing that you can come back to really is immigration and the fact that the border has been closed, that there isn't a huge amount of illegals coming in, and that legal immigration numbers have not gone up. So I think this slide is a very important one to keep in mind as it relates to household formation, demand drivers for multifamily as well as single-family, and until the government does something as it relates to increasing the amount of legal immigration in the United States, that demand side of the equation is going to be questionable.
I already talked about this, and then let's dive into a couple specific markets, and then I'm going to open it up for Q&A in a sec. Before we started, I was asked about what markets are hot and what markets are not, and the oversupplied markets. If you look at this slide and you look at these MSAs of, this is the top 10 markets right now, and you said, I hear all of the Sunbelt, job growth, companies relocating from California to Texas. You would sit there and say, okay, that would mean that San Francisco isn't a place that I want to be.
It happens to be at the very, very top of the list. San Jose is a place I don't want to be. It happens to be number two on the list.
Look at the cities here that are doing really well right now. Oh, by the way, look at the trailing five-year population growth, -4.5, -1.2, -0.9. Who's the winner on this list? We've got a whopping 2.8% growth in Cincinnati, Ohio, over the last five years. Not exactly boom from a population growth standpoint. But none of these markets had any real new supply into them over that five-year period, so they don't really need the new population to come in to get the type of rent growth that they've been able to get. These right now are the darling markets that while 2% rent growth doesn't sound that great, in comparison to this list, it looks really good.
Now look at all these markets. These are all your oversupplied markets. These are all the markets that all those shovels back in that previous one of starts into deliveries, this is where they all went. As you can see here, I mean, look at the population growth in all of these. At this one, our winner here was 2.8%. Look at these population growth numbers, almost all of them in double digits. It's where the jobs are, it's where the people are moving, except for the fact that they've all been wildly oversupplied.
You might sit there and say, I like the long-term growth of Austin, Texas. No doubt. I think you've got to like the long-term growth opportunities for Austin, Texas, except for the fact that in real estate, when you have oversupply to the degree that Austin, Texas, has had, you're going to have -7.7% trailing 12-month rent, it's not rent growth, it's negative rent. Over the last year.,Denver, Colorado, number two, -7.4%. Two really, really hard markets to be an owner in today. Austin, more than Denver, do they both have really, really good fundamentals to them? Without a doubt. Has Austin turned into a really affordable market almost overnight? 100%, single-family and multifamily. Austin, if I was starting Walker & Dunlop today and I had to pick a city to move to, Austin has so many things going for it, including it's super affordable today. Super affordable.
If you say, start today and go forward, Austin's a great market, except for the fact that you're probably going to have to feed that asset if you went and bought one for a period of time, because we're still trying to absorb all the oversupply that was in that market.
One of the big things that Peter Linneman, who comes on the webcast on a quarterly basis, and I constantly debate, is Peter is very much prone towards Cleveland, Ohio, and Cincinnati, Ohio. Sort of kind of boring Midwestern markets, and to anyone who I just offended by calling Cincinnati and Cleveland a boring market, excuse me. But it's kind of steady Eddie. You're never going to get this big surge in supply. And as a result of it, if you buy well, put low leverage on it, it's going to turn into a really good investment for you.
These markets are the ones that, there's a lot of what I call brass and glass there. People are like, man, I can go into Austin, and I can buy it, and I'm going to sell it at like a 3.2 cap rate at some point. By the way, I got a lot of clients who were investors in Austin, either built or bought back in 2013 and sold in 2018 or ‘19 at a 3.2 cap rate and made just enormous returns on multiples on their money. A lot of these markets, you can make a lot of money. But right now, as it relates to, do you want to be an owner in them?
I was just in Phoenix two weeks ago. Phoenix is still way oversupplied. The one other thing about Phoenix, the building of the new Taiwan semiconductor plant there, fascinating to see the amount of work and the kind of ecosystem that's going on in Phoenix right now around that investment. It's obviously not just that they're going to build a chip manufacturer there. It's all the ancillary services that need to be built out there. I met with a gentleman who is working with Taiwan Semiconductor as it relates to all the other kind of services that they need, the plants and how the plants feed products into the actual chip manufacturer, but then the multifamily and the retail and the office and everything that needs to be around that huge investment of tens of billions of dollars. It's really quite something and will be a great growth driver for the Phoenix market over the next couple of years.
In summary, before we go to Q&A, a couple of things on noise. You hear a lot about $200 barrel. We're not going to $200 oil on a barrel. Trump won't let it happen, period. The president will stop the conflict before we even get close to that. There's a lot of fear-mongering about that. That ain't going to happen.
Runaway inflation, one of the big things to keep in mind is that one of the main reasons that the inflation print has stayed as high as it is is because of owner's equivalent rent and because of multifamily rent growth that for whatever reason the CPI continues to get a false read off of.
But owner equivalent rent is 25% of the CPI, and nobody's ever paid owner equivalent rent, ever. I own three homes, and I don't pay rent to anyone. I pay a mortgage, but that owner equivalent rent of what would you rent your house to someone else for today, no one's ever paid it. It's a completely made-up number. If you call me today and say, what would you rent your house in Denver, Colorado for? I'll come up with some number, and I'm going to kind of triangulate off of some number I heard down the street. They'll tell me last month you said it was X. This month, is it up or is it down? I'll give you my gut reaction of I should charge more, I should charge less. That's the way they go about determining owner's equivalent rent. It's 25, 23% of the CPI. Makes no sense.
In the CPI number that has stayed elevated is an elevated owner equivalent rent number that shouldn't be there. I'd be interested to see whether Kevin Warsh, when he comes into the Fed, thinks about doing something to adjust it. It's one of the reasons why so many economists don't focus on the CPI, but focus on the PCE, because the PCE has a lower weighting on housing than the CPI.
But the bottom line on all this stuff is I told you about oil and the impact of oil. Oil stays high for a very long period of time. It will have an impact on the CPI, but I don't think we're going to have runaway inflation as many people are fear-mongering.
Higher interest rates. I don't predict interest rates, but what I would say is the following. You have a new Fed chair who is coming in, and there's no doubt that he has heard the president clearly that he wants to get the cost of borrowing down.
The second thing on all that stuff is you are either going to have Kevin Warsh being successful at lowering rates, or you'll have a sell-off in the equity markets that should have people move to safety in treasuries. The interesting thing since Iran is that you actually didn't see that happen. Typically, when there's an international conflict like Iran, people flee into, they jump into safety, and you would have seen yields on the 10-year go down.
That didn't happen this time, which is a little concerning. At the same time, if you do get a significant sell-off in the equity markets, there's no doubt that you're going to get the 10-year going down.
Death of the blue states and blue cities. I just showed you numbers on why they're not dead and probably aren't going away. There's lots of talk about all this great migration to the lower-tax, high-growth states, but from a real estate standpoint, those states are still struggling.
And then transaction volumes remain muted. I showed you. There might be a narrative out there that says transaction volumes are muted, but at least in multifamily on the sale side, it's back to the normal.
On the signal, CRE capital flows will drive transaction volumes up and cap rates down. I showed you that rotation of capital from LPs. That is going to continue. That doesn't stop. The capital hasn't gone back to them. They'll continue to ask for their capital, and fund managers who want to raise their next fund are going to have to recycle that capital. That recycling of capital means that they're putting it into assets as they sell them and refinance them. More capital flows mean cap rates come down. You then go from a, I don't want to sell market, to I'm ready to sell market, and transaction volumes come. That's the way it will happen.
Multifamily is significantly more affordable than single-family. That's there. That's structural right now. That doesn't change quickly. Prices of single family have to come down materially, and the cost of borrowing has to come down materially for that to change. For quite some time, multi continues to win over single.
Sunbelt will continue to attract jobs and families. No doubt about that. You saw the job growth numbers that I put up there. They are the long-term winners right now, unless blue states can figure out how they can get their tax policies in place to retain and attract new investment.
Population growth problem without increased legal immigration. That is a really important one. By the way, the administration can work on that. They can say, we only brought in 700,000 legal immigrants last year. Let's bring that up to a million. Let's bring that up to a million, too, and start processing more legal immigrants to the United States.
Then the final, rates will come down due to cuts or the sell-off in the equities. Again, I don't try and predict where rates are going to go. I get asked about it all the time. I'm smart enough to leave that to economists and not myself. You just think from a signal standpoint. There'll be plenty of noise in there. From a long-term outlook standpoint, we should be in pretty good shape where rates should come down either from a sell-off in equities or that Kevin Warsh is effective as the Fed chair in bringing down the short end of the curve, and the long end should follow at some point.
That is it for my prepared remarks.
I am up for any and all questions. Let's dive in.
Speaker 3:
Hey, Willy. Michael Kamis, MIT MS Red. Thanks again for coming out today. You're a native Washingtonian. You've long been a proponent of this city, and it's great, a real estate market. You recently had Mayor Bowser on the webcast, and she's communicated her and her team are all in on D.C. to bring business and investment back to D.C., but there's obviously been some hesitancy from investors in reentering the D.C. Real estate market. I'm curious if you're still bullish on D.C., and what do you think needs to happen to make those investors more comfortable to reenter?
Willy Walker:
A couple of things on that. The big story of 2025 that has not been covered widely, but that Peter Linneman has underscored not only in our last conversation, but in the Linneman letter, is that the federal government shed almost 250,000 jobs last year. Almost 10% of the federal workforce was shed in 2025. Peter's comment is that the Trump administration hasn't jumped up and down and said, look, we actually did what we said we were going to do as far as thinning things out. Elon Musk came into town to do his DOGEstuff and left town, and everyone sort of said that was an effort that we're not going to follow up on. But that shedding of federal workers is a very, very significant economic driver for the greater D.C. Area. If you think about it theoretically, those people will then go find jobs in the private sector, which if you're a libertarian, as my friend Peter Linneman is, you're like, that's great. They're going to go into productive jobs rather than just redistribution jobs. Those are Peter's words, not mine. But that does put pressure on the D.C. Employment market.
The other thing that when DOGE came in, one of the big concerns I had was all of the consulting firms that sort of, if you will, feed off of the federal government apparatus from a defense contracting standpoint, from a process engineering standpoint, the likes of Booz Allen and other big consulting firms, they were very much sort of under target for redo or elimination of their contracts. From what I have seen, that sort of came and went pretty quickly with DOGE so that they are still doing as much business.
Then the other piece to it is you've got to remember, we're going to print a, what, $2 trillion deficit in 2026, $2 trillion. The bottom line is the federal government is still spending money hand over fist. It's sort of a tale of two cities, if you will, in the sense that you actually had 250,000 job cuts out of the federal workforce, which is big downward pressure, yet you have a federal budget that's running a $2 trillion deficit and is spending money on everything over and over and over.
The question there is what does all that mean for the D.C. Area? D.C. Is struggling, and they have a new mayoral race coming up, and Muriel is stepping down from her role, and we'll see who the new mayor is. Northern Virginia is doing extremely, and suburban Maryland is also struggling in a very big way.
Governor Wes Moore of Maryland has a big challenge in front of him as it relates to getting that state in a position where it can attract jobs and attract companies.
Speaker 4:
Willy, thank you. That was an amazing presentation. I am thinking about the recent regulation on private equity ownership of single-family homes, and I'm curious what your thoughts are on how that affects the rent versus own math.
Willy Walker:
The legislation that went from the Senate to the House has in it a provision on bill for rent that requires anyone who builds a bill for rent community to sell the community in seven years. That's really bad legislation. In a bill that is designed to try, and increase the amount of supply of housing in America, they put in there a paragraph that does exactly the opposite.
The bill for rent market has been frozen since the Senate passed that legislation. By the way, they passed it 91-8. One person didn't vote. 91-8. They haven't passed anything in the Senate 91-8 in a long time. When you have Senator Tim Scott from South Carolina and Senator Elizabeth Warren from Massachusetts both fighting for the same legislation, something's sort of gone wrong, to be honest with you. I mean, honestly, they should be on different sides of most issues, and this one they both jumped in on. Unfortunately, that paragraph on BFR is going to set the bill for rent industry back a lot. Senator Warren is very specific in saying it only applies to those who own over 350 homes, and that is only 70 basis points of homeowners in the United States.
she's pretty careful with her numbers here. She's like, it's only impacting 70 basis points of single-family homeowners, except those 70 basis points are the only people who have the capital to build new homes. Everyone else is just a single-family homeowner.
It's those companies that actually build bill for rent, that create the bill for rent supply, that then feeds into the single-family rental market. This seven-year provision is a real problem. I got something last night that there's actually some real progress going on, and a number of congressmen and women have signed on to basically say this provision needs to be changed.
I actually also heard that the Speaker of the House understands the problem and has asked the Chairman of the House Financial Services Committee, French Hill, to focus in on this and potentially change it in the House legislation. We will get that law passed as it relates to the other provisions in it, and the President and his executive orders to try and create more supply and bring down the cost of housing in America. But that one provision on BFR, have to sell after seven years, hopefully gets pulled out in the actual legislation.
But for right now, there is not a big institutional investor that will put a dollar into a BFR community right now, given the potential regulatory risk around it.
Speaker 5:
Hi, Chip Weintraub. Thank you for coming here. so I just wanted to ask about rates and inflation. A couple of things you didn't really spend a lot of time talking about was the national debt, the demographic trends, and trade, all of which, in my view, are highly inflationary and changed dramatically over the last five years. Wondering if you could sort of, and that's a very large question, but if you could sort of comment on those within the context of what you'd said before.
Willy Walker:
Thank you. Sure. I'll give a big disclaimer before I say anything on it. I am not an economist. I'm not a trained economist. But I will tell you from having done now almost six years of quarterly Walker Webcasts with Peter Linneman, who is one of the truly great economists of our time, I do feel like I've gotten a PhD in reading the Linneman letter on a quarterly basis and being able to go to Peter with lots of questions. So I will say everything I'm about to say is 100 percent from Peter Linneman. Okay? This is not my thinking. This is all out of Linneman.
Linneman has spoken extensively about the fact that he doesn't think that the national debt is a big issue. I don't want to dive into Peter's reasoning, although one thing that I would say is just he goes to our overall national net worth, what this country is worth, how much GDP we are developing and growing. And he basically says, if you're adding $3 trillion to $5 trillion a year of net wealth to the United States, you can easily afford to be printing $2 trillion of deficits on an annual basis. As long as you keep that GDP growth going and we're creating $3 trillion to $5 trillion of additional net wealth to the United States every year, you can run $2 trillion deficits, and it's not going to catch up with you. The one thing that you know very well on that one is that's as long as we remain the reserve currency. And if we lose that position, we're in real trouble.
The issue with it is go back and think about this. China is now squawking about that they want to create the reserve currency. There obviously was some thought that Bitcoin and other cryptocurrencies were going to be a better store of value than the US dollar as the reserve currency. The euro had every opportunity to become a real competitor to the US dollar, except for the fact that they never got the UK into it, and they never got Switzerland into it, two of the larger economies from a financial services standpoint.
Because of that, it's never really had the chance to be a real competitor to the dollar as it relates to a reserve currency. Then think about how long the euro has been out there and how long they've been trying to make a run of making the euro be any kind of competitor to the dollar. We're talking about things that take decades, quarter centuries, half centuries to get developed. Right now there's a lot of talk about the debt's too high, lots of our allies are, there was the big narrative last year, that actually is another one on noise versus signal.
There was a lot of talk last year about all of our allies dumping their treasury holdings because they wanted to kind of give the finger to the United States. Didn't happen. You look at treasury holdings of foreign countries, they're going to go work for yield and safety. They can sit there and listen to politicians say, we don't like this, we don't like that. They're going out, they have a fiduciary responsibility to get for their investors what they need to. They weren't dumping treasuries.
I would just say as long as we remain the reserve currency of the world, unfortunately, we can continue to be profligate spenders and not treating tax dollars the way that they ought to be. The one other thing that I would throw out there is this kind of blue state, red state, and tax policies has a huge impact on decades worth of growth and where companies are going.
I happen to live in the state of Colorado. Colorado is 4.4 percent income tax, which is actually quite low relative to other states that have income taxes. There's a ballot initiative in Colorado right now to try and overturn the taxpayer's bill of rights that holds that at 4.4. I've been talking extensively with legislators about how damaging that would be to Colorado. If they were to take it from 4.4 to, they've been talking about 8-9% if they were able to overturn it.
One of the things I've been advocating is why don't you all think about going to zero? Every time I say that, they're like, what do you mean? Like, we can't go to zero. We've got a billion-dollar deficit this year. I said, the bottom line here is think about the type of growth you would get of companies moving from California to Colorado if you dropped it from 4.4 to 0 and what that would do to your overall fiscal position. The thing that Colorado has that many other states like New York or California don't have is that because California and New York get about 50%, if not more, of their income from income taxes, they can't do away with it. They can't go to zero. Colorado only gets 20 percent of its income from its income tax. There are lots of ways to make up for that nine billion dollars of income tax that they bring in, property taxes, fees, other things that you could put there.
The bottom line that I'm trying to put out there is that until state governments and local governments understand that they are constantly competing for residents, Zoom and the pandemic changed everything. You used to not, like I moved from Washington, D.C., where Walker-Dunlop is based, to Denver, Colorado in 2019, pre-pandemic. OK, it was a huge decision.
I was like, we got 250 people in headquarters. I'm going to be leaving, going out to Denver, Colorado. I'm going to be back here every two weeks. That was my plan to constantly commute back to the D.C. Area because that's where my team was, my senior executive team was, our headquarters were. Even though we have 45 offices across the country, I was like, I got to get back to headquarters. Boom, pandemic happens. My senior management team goes all over the country. We learn how to do Zoom calls. It literally today does not matter where I am and where my executive team is.
Every company in the country has that dynamic today. Everyone. You don't have to be somewhere. Jamie Dimon talks about the fact that from when he joined JPMorgan Chase to today, they've gone from 45,000 jobs in New York to 35,000 jobs. In the process, they've gone from 5,000 jobs in Texas to 30,000 jobs in Texas. It's like Mayor Mamdani can tap on the camera and be like, ha ha, we're going after you, Ken Griffin, and just watch all that money move away. So one of the things that I'm trying to get in Colorado then to focus on is don't go raise the income tax, raise property taxes, because the property in Vail and the property in Aspen isn't going anywhere. You can't move it. That billionaire who owns their $50 million home in Aspen, they may not like the fact that their property taxes go up a little bit, but they're not going to Jackson Hole.
I think governments need to shift on what they're taxing and how they're taxing it to try and keep the revenues in the state, because if they're just going at, we're going to chase some billionaire out of California, they're going to move to Florida or Texas tomorrow, and it's at almost no switching cost.
That's a big issue, I think, from overall growth in the coming decades and what, quite honestly, blue states and blue cities need to do to retain and attract jobs and people.
Speaker 6:
Hey, thanks, Willy, for a really informative discussion there. I'm Tanner Mix. I'm an incoming student, class of 27. My question, it's a little bit more of a niche market, but the senior housing that I brought up before we started today, demographic shifting-wise, we're seeing probably a doubling of that market over the next 10, 15, 20 years, and the market itself is already under-supplied, estimates somewhere in the neighborhood of 500,000 units.
My question to you is from your vantage point, how should sophisticated capital be positioning itself today in order to meet that demand, and what type of challenges are there still to be overcome when it comes to meeting the scale that we need to meet, maybe capital structure, and then also, like, operationally, how can we improve our efficiency to make it affordable and beneficial to investors?
Willy Walker:
I'll ask you a question. What do you think the percentage, and keep the microphone for a second, because I'm going to ask you this question. What's your handicap, us having another pandemic within the next 10 years?
Speaker 6:
Very unlikely.
Willy Walker:
Another pandemic in the next 20 years?
Speaker 6:
Still unlikely, I would say.
Willy Walker:
When you say unlikely, 5% chance, 50% chance, 49, less than 50?
Speaker 6:
As far as pandemics go, if you take a 200-year vintage on it, it's happened twice-ish, so maybe 1%.
Willy Walker:
The reason I ask that is that if I asked you the same question about the great financial crisis right after the great financial crisis, I think you would handicap the chance of a great financial crisis similarly to what you just did on the pandemic. Great Financial Crisis is over, generally speaking, in 2010. I was certain that the CMBS market, commercial mortgage-backed securities market, would go back to sort of the silly math that created the great financial crisis, that liquidity would come back, a lot of the bankers would move from one bank to the next bank, and they would get back to the same lending habits that they had.
Until today, 16 years later, CMBS hasn't gotten back to the same practices that caused the great financial crisis. Those memories last for a long period of time. Even though the chance that we were going to have another great financial crisis due to over-leverage on CMBS, and you can either go CMBS or the single-family mortgage market as the drivers of the great financial crisis. I would say to you that the reason I'm trying to bring this up is because the pandemic, I think, materially changed people's views of seniors housing. The amount of death that happened inside of seniors housing communities was something that scared people my age who had parents who might be in seniors housing to their bones. So there has been a big move for people to say sort of anything but. Yet at the same time, the demographics behind it are unbelievable. You just sit there and look at the numbers, you're like, this asset class is going to be full, and it's going to crank for years and years.
I would say to you, you look at the math and you say, yeah, you should go build there, and it's going to be a great asset class to own in, and it's going to be full.
But I go back to the GFC and CMBS and the long memories that stayed in place after that. I sit there and say, it might take longer than you think to get people to go back into that type of living. There are some great companies that are making a lot of money right now.
My friend, Deb Cafaro, runs one of the largest publicly traded seniors housing REITs out there. They've got a great business. But that asset class had huge losses in 2021 and 2022, huge. Those memories are still there from a lending standpoint. Fannie Mae and Freddie Mac, the only real losses they had in 21 and 22 were in their seniors housing portfolios. So people underwrite more conservatively, and they look at that risk with a little bit, am I going long there or am I staying short? And I think that will impact seniors housing for the next couple of years.
Speaker 6:
Thank you. Yep.
Willy Walker:
I think we have time for one or two more.
Speaker 7:
Thanks, Willy. My name is Ryan Othman. I'm a MIT MS Red. You spoke about private credit. I understand the SaaS spook because of the AI and vibe coding age. Why do you think investors are spooked by real estate private credit? And why also on, one thing you mentioned in the presentation, you said that fleeing from private credit might go into private equity.
Willy Walker:
Commercial real estate, private equity, yielding private. One of the big issues there is yield.
Willy Walker:
One of the reasons why the private credit market is attracted so much out of the retail distribution network is because there are a lot of retirees who want that coupon that comes off of their investment in private credit. As they get concerned about private credit, they're like, maybe I'm going to pull that back and reallocate it somewhere else. They can't go to just a normal private equity vehicle because private equity vehicles don't have a current return. Whereas commercial real estate private vehicles, particularly credit vehicles have a current return. So it's something that a RIA can sit there and say, okay, we're going to pull you out of that private credit fund. We're going to put you into that real estate fund. That's the reason I believe that it competes quite well in any reallocation of dollars because people need yield.
The one other piece to it is there's $7 trillion of capital right now, $7 trillion sitting in money market funds. If Warsh comes in and starts to cut the short end of the curve, people will rotate out of money market funds. By the way, they will not go from $7 trillion to zero. Back when the fed funds rate was at zero in 2012 and 2013, there was still $3 trillion of money that sat in money market funds. Don't think it goes to zero. There's a certain amount of capital that will always sit in those money market funds. But you could see $7 trillion go to $5 trillion. And where's $2 trillion of capital go? By the way, we used to talk about billions being real money. Now it's trillions. Where's $2 trillion go? That's real money.
If you take $2 trillion out of money market funds because the short end of the curve gets lower and you get any kind of rotation out of the private credit funds, I think net net that's probably beneficial for commercial real estate because it's a yielding hard asset.
The final piece I'd say on that is, look, who knows where AI goes? Who knows whether these SaaS companies get just obliterated by AI or whether they actually live for another day. That's way above my pay grade. But in commercial real estate, you have yielding assets. They're hard assets. So in a world that has a lot of shifting and moving parts to it, people have got to live somewhere. Multifamily hangs in there pretty tough.
People don't actually need a place to work. People, bricks and mortar, retail. What percentage of us retail sales today goes online versus through bricks and mortar? I'm going to ask you directly. What percentage is online versus through bricks and mortar? You're going to say 40% online and 60% through bricks and mortar. Other way around 60% online and 40% bricks and mortar, 16% online, 84% bricks and mortar, 84% bricks and mortar, 16%.
It got to a high of 20 during the pandemic and has come back down to 16. Your impression is 100% where most people are. Everything is Amazon, and everything's UPS and FedEx. That's what you think. Ain't so.
Retail is actually still a very important part to the retail channel is bricks and mortar. So retail is a good place. Hospitality. If AI puts all of us on the beach, we can all make huge amounts of money on our investment in OpenAI, and we can just put our feet up on the table and go do something else. High-end hospitality does really well in that scenario. The hotel I'm staying in here in Boston for work probably doesn't do that well. But high-end hospitality of me going to the beach, that's going to do really, really well.
Then, data centers, the one thing on data centers, I asked Linneman this a year and four months ago in our conversation in Philadelphia, I said, so if you had to pick one asset class that you would invest in and obviously location's important, all that stuff, but just one asset class that you'd invest in right now, what would it be? Peter looks at me, and he goes, if I wanted to stay rich, it would be multifamily. I said to him, okay, well then if multifamily is the one that you would stay rich in, what would you get rich in? He goes, office. I was like, interesting. He goes, yeah, there's some really great office deals. If you'd heard that from Peter and you'd invested in San Francisco office, you've made a huge amount of money, huge amount of money. So I said, okay, you've said stay rich and get rich. How about get poor? He goes, data centers.
Now Jeff Blau was just on CNBC yesterday morning, and he was talking about this $36 billion data center that related his building for Oracle, who's going to lease it out to OpenAI. There are a couple of things to keep in mind there. First of all, the JP Morgan headquarters that they built in Manhattan, that they talk about it costing 3 billion. It's more likely to cost them 5 billion, but that's like the most expensive office building ever built in the United States of America. Three to $5 billion. Jeff Blau's talking about a $34 billion investment in a data center. This is orders of magnitude bigger than anything we've ever seen.
One of the other interesting things that he said yesterday was that they went through the 144A market to raise capital for it rather than going to the bank market. Super interesting. Basically, this market has gotten so damn big that banks don't have the ability to even syndicate out the loans on there.
They've had to go to the securitized markets in 144A registration to go raise the capital on it.
Then the final thing that I have thought for quite some time is if data centers are fundamental to the future of companies like Amazon and Microsoft, why are they doing it all off-balance sheet? Just a question.
If it's fundamental to their business in 10 years and 20 years, why are they putting it off-balance sheet rather than actually owning it? There's no doubt we're going to have oversupply in data centers. There's just no doubt. Look at that slide that I had as it relates to everyone's like, let's go buy multifamily. We've got to put a shovel in the ground and go build it. We're going to get oversupply.
The question is what are the repercussions of the oversupply, and how does that then filter out into the valuations of the hyperscalers, the valuations of the oracles of this world, and the valuations of companies like Related that are actually building the data centers. It does seem a little bit like everyone's getting really careful on how they're structuring these things because there's kind of a sense that at some point everyone grabs, and you want to have the proper structure that makes it so when everyone grabs, you're not left out in the cold.
Speaker 8:
Hey, Willy. Thank you again for being here. Emmanuel Shumya, MIT real estate student. You touched a little bit on immigration. I had a question about how that relates to the construction labor supply market. Immigrant workers are like a third of it and it goes up to anywhere to like two-thirds for certain trades like drywallers and more skewed also towards single-family home construction. I guess to what degree is that our new starts impacted by current immigration policy and constrained supply of workers that can do new construction?
Willy Walker:
I'm going to surprise you. Zero. Zero. It's unbelievable. I have asked that question at almost every single meeting I've had with either a merchant builder on the multifamily side or a single-family home builder. I know lots of the CEOs of the big single-family builders. It is not only not impacted it as it relates to the supply of labor, but the cost of the labor has actually come down.
you're seeing deflationary forces from a labor input on construction, which is complete counter-narrative to what you would think it would be. So it has not impacted access to or the cost of construction labor one iota. That's an anecdotal comment in the sense that I haven't looked at some actual study that says we've gone and studied everyone in the industry. That's from me meeting with the very big merchant builders, the very big single-family development companies, and just saying how's it going. To a person they all said hasn't impacted us one a bit. It's a very interesting back to noise and signal.
The noise is that you're not going to get people showing up in the job site. You're not going to be able to get labor. Cost of labor is going to go up. Hasn't impacted it one iota. Thank you all for taking the time. It's been a real pleasure. Thank you.
